Do words transform into actions? The consistency of central banks? communications and decisions

Abstract

Research background: This study investigates central banks? (CB) intentions as reflected in their minutes and their relationship with policy decisions. Although CB communication is an inherent part of their inflation targeting (IT) strategy, their communication does not necessarily result in actions. 

Purpose of the article: This study aims to extract policy intentions from central bank minutes and juxtapose these with actual policy decisions to investigate the consistency of their words and deeds in a comparative context. Additionally, we compare the applicability of three dictionaries in policy communication assessments.

Methods: Computational linguistics and textual methods are applied to create proxies for tone from a large dataset of texts. A transformation of words into time series involves the application of a general economic dictionary and two monetary policy-adjusted dictionaries. We examine the association between tone and actual CB decisions with the eta squared coefficient. The research covers 15 European CBs, divided into three subgroups according to the CB experience in inflation targeting. The sample starting points differ as they relate to each country?s IT implementation year; the analysis ends in mid-2019.

Findings & value added: This paper?s value added is firstly methodological, as we test three dictionaries to determine their usefulness. Statistical and qualitative analysis allows us to conclude about superiority of monetary policy specific lexicons for this kind of studies. The extra value added is about the study?s coverage: it covers a large sample and provides a broader illustration compared to most previous examinations. Our results suggest that a relationship exists between communications and actions, although the weakest for late joiners to IT. The latter group of CBs needs to strengthen communication practices. In experienced inflation targeters the short run dimension of credibility exists and opens the room for creating effective monetary policy in terms of managing the expectations of a general audience.

Keywords

monetary policy, communication tone, dictionary methods, computational linguistics

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